Treasury releases new 'say on pay' guidelines for bonuses

Compensation committees are in charge of pay consultants, not CEOs: Treasury

By

RonaldD. Orol

WASHINGTON (MarketWatch) -- Treasury Secretary Timothy Geithner on Wednesday recommended a series of new compensation guidelines for banks and other corporations that he said would better protect the interests of shareholders and employees and more closely tie management pay to performance.

"We had a good discussion about broad principals that will guide evolutionary practices going forward," Geithner said. "We want to see compensation plans better measured and we want to see compensation practices to be better aligned by sensible risk management practices."

The guidelines call on the Securities and Exchange Commission to give investors a vote on the compensation of the salary, bonuses, golden parachutes and other pay for the top five executives at corporations. The House approved a so-called "say on pay" proposal in 2007, and lawmakers in both chambers are likely to approve such a measure later this year.

The proposal would also grant key new powers to corporate compensation committees and make the compensation committees the only groups permitted to hire pay consultants.

Having pay committees control compensation consultants would solve the conflict of interest problem of executives hiring consultants that assist them in finding pay proposals that are not aligned with the interests of the corporation or its shareholders.

"The consultant can't serve two masters," said Charles Elson, professor of corporate governance at the University of Delaware. "If the CEO picks the consultant it is likely that the pay scheme will be good for management at the expense of shareholders."

Kenneth Feinberg, a Washington attorney, also participated.

The White House also announced later in the day the appointment of Washington attorney Kenneth Feinberg as the new compensation czar for corporations that receive funds from the government's Troubled Asset Relief Program, or TARP.

Feinberg will have broad authority to set pay limits for the top 100 employees of institutions that have received a substantial amount of TARP funds. These institutions are likely to include Citigroup Inc., for example, received two cash infusions from the TARP program, General Motors Corp.
GM, +3.40%
auto lender GMAC, Bank of America Corp.
BAC, +0.61%
and American International Group Inc.,
AIG, +0.02%
which is 80% government owned.

Feinberg's previous high-profile job was to set up the Federal Victims Fund, which was responsible for identifying a financial value on the lives of victims of the 9-11 attacks.

No salary caps

However, Geithner indicated that the Obama administration is dropping a proposal it introduced in February that would have limited salaries to $500,000 for top executives as corporations - banks and others - that received significant government capital injections through the bank bailout program, the Troubled Asset Relief Program.

"We do not believe it's appropriate for the government to set caps on compensation," said Geithner.

The proposals, which do not have the force of law, are recommendations to Congress and the SEC for both legislation and rule-making. They were included with a series of broad guidelines lawmakers and regulators should consider when it comes to executive compensation. The Treasury said compensation plans should be structured for broad time horizons that match risks with rewards at corporations.

The agency called on corporations to have executives hold stock for longer periods of time, but it did not provide any details. The Treasury also questioned whether golden parachutes and retirement plans that many executives have align the risks of executives with shareholders and employees; however the proposal did not provide further details.

"Companies should seek to pay top executives in ways that are tightly aligned with the long-term value and soundness of the firm," the report said.

Prior to releasing the proposals, Geithner meet with Securities and Exchange Commission Chairwoman Mary Schapiro, Federal Reserve Governor Dan Tarullo and a number of compensation experts. New compensation czar Feinberg also attended the meeting.

Compensation experts that participated included Nell Minow, director of the Corporate Library, Arthur Levitt, former SEC Chairman during the Clinton administration, Harvard Law School Professor Lucian Bebchuk and Ann Yerger, director of the Council on Institutional Investors. John Spector, president and CEO of The Conference Board, and Deputy Treasury Secretary Neil Wolin, participated as well.

Geithner said compensation recommendations for banks receiving government funds through the TARP program will be released shortly.

The guidelines were released before Treasury counselor Gene Sperling testifies before the House Financial Services Committee on Thursday about the role of pay structures in the financial collapse. In addition to Sperling, Scott Alvarez, general counsel at the Federal Reserve and SEC deputy director Brian Breheny, are also both scheduled to testify. Hearing details.

SEC risk disclosure rules coming soon

SEC Chairwoman Schapiro said the agency has its own series of compensation disclosure initiatives it is working on. On June 2, Schapiro told lawmakers the agency plans to introduce new pay disclosure rules in July.

The agency will likely propose rules that would expand the kind of information director nominees must disclose about themselves. Currently, board candidates describe what they do, but don't provide information about why they do it.

"Our proposals will compel companies to carefully analyze what conduct and behavior they are encouraging, particularly in respect to risk taking through compensation structures," Schapiro said.

Greater disclosure rules would require director candidates to explain whether they have short-term incentives to take unusually high risks. Companies would also need to explain how compensation structures drive management or director risk-taking.

The proposal is also likely to require companies to explain why they have a particular leadership structure. Companies will need to explain, for example, why they have one individual as both chairman and CEO.

A new endeavor would follow up on compensation rules the agency adopted in 2006. At the time, the agency approved a requirement that corporations list compensation details for the top five executives. The SEC had proposed listing details about the pay packages of the top 10 employees at any corporation, but the measure wasn't approved after some commissioners argued it would interfere with the private lives of highly paid individuals that do not have an impact on the corporation.

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